Tightening Grip: Central Banks Signal Rate Hikes Amid Inflation Pressures

Central banks dominated financial markets last week as Federal Reserve Chairman Kevin Warsh hinted at an interest rate increase in his first Jackson Hole address. This shift in monetary policy led to rising government bond yields, with long-term yields nearing their highest levels in two decades. As a result, real yields weighed on equities and gold.

Oil prices rebounded above $90 after US strikes on Iranian launchers near the Strait of Hormuz. The Blue Chip Financial Forecasts survey suggests that policy rates will rise over the next 12 months in Japan, Canada, and the euro area, with modest increases expected in the US and Australia. In contrast, UK interest rates are forecast to fall.

Meanwhile, shipping costs and global supply-chain pressures are rising again, putting upward pressure on inflation. Labour demand is shifting towards sectors where supply constraints are most pronounced, while core inflation across the G10 remains relatively close to target.

The real cost of capital has moved decisively higher after declining for four decades, according to Haver Analytics' charts.